Richard Ivey School of Business The University of Western Ontario                                                         ...
Page 2                                                                                      9A86C043   THE HOTEL    Centur...
Page 3                                                                                 9A86C043          We got off to a s...
Page 4                                                                                                     9A86C043   cond...
Page 5                                                                                      9A86C043   Dahak Ibrahim, chai...
Page 6                                                                                   9A86C043   Interest in QC activit...
Page 7                                                                                    9A86C043             No, I am no...
PageS                                                                               9A86C043          We try to manage by ...
Page 9                                                                            9A86C043         I also think our promot...
Page 10                                                                                 9A86C043                          ...
Page 11                                                                                         9A86C043                  ...
Page 12                                                                                 9A86C043                          ...
Page 13                                                                       9A86C043                                    ...
Page 14                                                                                   9A86C043                        ...
Page 15                                                                              9A86C043                             ...
Richard Ivey School of BusinessThe University of Western Ontario                                                          ...
Page 2                                                                                                       9B06M083JACQU...
Page 3                                                                                                                    ...
Page 4                                                                                              9B06M083recognized for...
PageS                                                                                             9B06M083KEMPS SIZE-UPAlt...
Page 6                                                                                            9B06M083          Strate...
Page 7                                                                                         9B06M083         for exampl...
Page8                                                                                   9B06M083                          ...
)    Page 9                                                                                                               ...
Page 10                                                                                            9B06M083               ...
Page 11                                                                                    9B06M083                       ...
Page 12                                                                                                                   ...
Page 13                                                         9B06M083                                             Exhib...
Page 14                                                                                                                   ...
Page 15                                                                                     9B06M083                      ...
Richard Ivey School of BusinessThe University    of Western Ontario                                                       ...
Page 2                                                                                                         9B09M028reg...
Page 3                                                                                                     9B09M028The Maj...
Page 4                                                                                             9B09M028The government ...
Page 5                                                                                                 9B09M028such as Bri...
Page 6                                                                                        9B09M028A series of environm...
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Bu 628 part 2
Upcoming SlideShare
Loading in …5
×

Bu 628 part 2

3,018 views
2,901 views

Published on

Wilfrid Laurier University MBA

Published in: Education
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
3,018
On SlideShare
0
From Embeds
0
Number of Embeds
10
Actions
Shares
0
Downloads
13
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Bu 628 part 2

  1. 1. Richard Ivey School of Business The University of Western Ontario 9A86C043CENTURY PARK SHERATON SINGAPORESing Chee Ling prepared this case under the supervision of Professor Joseph J. DiStefano solely to providematerial for class discussion. The authors do not intend to illustrate either effective or ineffective handling of amanagerial situation. The authors may have disguised certain names and other identifying information toprotect confidentiality.Ivey Management Services prohibits any foim of reproduction, storage or transmittal without its writtenpermission. This material is not covered under authorization from Can Copy or any reproduction rightsorganization. To order copies or request permission to reproduce materials, contact Ivey Publishing, IveyManagement Services, clo Richard Ivey School of Business, The University of Western Ontario, London,Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.Copyright @ 1986, Ivey Management Services Version: (A) 2003-04-28Chua Soon Lye, Personnel Director at Singapores Century Park Sheraton, hadplayed a central role in the hotels program to build greater employee commitment.Though Mr. Chua was pleased with the smooth implementation of the workexcellence committees in the hotel, he wondered if the base of employeeinvolvement was firm enough to move to even greater employee responsibility indecision making in the future. Over drinks in the hotels lounge, Mr. Chuaelaborated upon his concerns. The work excellence committee was formed within this organization to achieve the goals of increased organizational effectiveness and improved employee welfare through a process of union-management joint consultation on work-related issues. While we have made significant progress in reaching our goals through improved labour-management relations, we have yet to reach our final objective of an equal sharing of the responsibility in decision making in all. aspects of the hotels operations. Could these aspirations be too demanding of our people? Had the pace of our program for employee participation been too rapid? On the other hand, I believe that the success of activities like work excellence committees is built upon a momentum. Thus, i feel the need to press forward to the next level. This dilemma is a happy one in fact, because it arose as a consequence of our success.
  2. 2. Page 2 9A86C043 THE HOTEL Century Park Sheraton Singapore (CPSS), a 464-room, luxury hotel, decorated in classical English 19th century style, was officially opened in January 1979. It is a . 14-storey hotel situated on Nassim Hill, off Tanglin Road, on one end of the Orchard Road tourist belt. It was the first ANA-managed hotel I in Singapore. The hotel, situated on 11,500 square metres, offers the following facilities: Hubertus Grill, a western- style grill room; Unkai, a Japanese restaurant; a 250-seat coffee house and cafe terrace; a cocktail lounge; discotheque; a 180·seat function room; and a swimming pool. . Under the general manager and the resident manager are the departments of sales, purchasing, front office, accounts, food and beverage, personnel, engineering, housekeeping and security. (See Exhibit 1.) The maximum number of employees had been around 640, but by August 1985 the level had dropped to 504. The Chinese constituted the majority in the hotels workforce; Indians, Malays, and Eurasians made up the balance. A small number of expatriate personnel were also employed for their expertise. The General Manager and some chefs were German, while the Resident Manager, the Director of Food and Beverage, and the Executive Chef were Swiss. The CPSS, like the other hotels within the industry, provides on-the-job training in various functions. This was because the Singapore population had little experience in the hotel industry. While it was quite common for management personnel to have university or other professional qualifications, rank-and-file personnel were likely to have some secondary education or hold trade certificates. Because the education system offered instruction in the four official languages of the country, some hotel employees were more literate in Chinese, Malay or Tamil than in English. English, however, is the language used for official communication. A great number of CPSSs employees subscribe to the Food and Drinks Allied Workers Union, the union for the hotel industry. This union is affiliated to the national federation of unions. But the unions role has to be seen in the context of a country which prides itself on favourable labour-management relations and boasts a record of not having a strike since 1977. EARLY EFFORTS Mr. Chua, who had worked in the personnel function in both the shipbuilding and aircraft servicing industries, had joined the CPSS Hotel in 1979. Over the years, he witnessed the change in labour-management relations. Mr. Chua traced the sequence of events. This is a chain of hotels owned or managed by All Nippon Airways. 1
  3. 3. Page 3 9A86C043 We got off to a slow start. Before 1981, the labour-management characteristics in the hotel were more typical of traditional confrontational attitudes between labour and management. This impeded efforts at bringing about change to raise productivity. We wanted to increase productivity through restructuring jobs. This led to the formation of a nine-person joint union and management committee called the Job Enlargement and Enrichment Committee in May 1982. The original implementation of these changes was to have been around October of that year. Job restructuring, in effect, would mean a recombination of duties, or more shifts, e.g., the pool attendant, groundsmen and housemen, originally three jobs, were to become one. Cashiers were expected to manage the till at more than one location in the hotel. Despite reassurances that training would be provided and that there were to be no retrenchments, there was more talk than progress. I am proud of the fact that we began on the productivity effort . through human resources management even before the government launched its productivity movement. This is a nationally promoted effort to increase productivity consciousness in the Singapore workforce. By 1982, we had started both the quality circle and the work excellence programs. But I felt that we were making progress only after the labour contract was negotiated, and new union leaders were elected in that year. In retrospect, 1982 was a turning point. THE WORK EXCELLENCE PROGRAM The concept underlying the work excellence committee was first introduced to Singapore in 1981. It was believed that improved labour-management cooperation would result from regular consultation on work-related issues by committees comprised of labour and management representatives. This concept was the theme of the May Day seminar organized by the National Trade Union Congress (NTUC). The Shangri-la Hotel, which was the first hotel to embark on this program of labour-management cooperation, was heralded as the model for work excellence committees in the hotel industry. It was also at this seminar that the acronym WE committee (WE standing as much for "us" as for work excellence) was established. The adoption of WE committees in CPSS took place through a series of steps. Separate meetings at top management, departmental, and union levels were held through the months of July and August 1982 to discuss the feasibility of WE committees. When union and management met jointly, the meetings were
  4. 4. Page 4 9A86C043 conducted with the aid of an official from the National Productivity Board (NPB)? The consultant from NPB emphasized that his role would lessen progressively as improvements in labour-management cooperation were made. It was only after the preliminary groundwork was laid that a joint formal application was extended to the NPB to organize WE committees in the hotel. . An important part of installing WE activities was the training session organized for 27 persons from both union and management over a period of three days. Activities of the program included games in small group sessions to learn different methods of conflict resolution. One session resulted in both management and union recording two unflattering lists outlining their perceptions of each other. Union members perceived the management to be, among other things, sarcastic, high in flattery, autocratic; and making empty promises. On the other hand, management perceived the union leaders to be revengeful, insincere, and giving lip service. The discrepancy between the desired and actual state of affairs was the starting point for future improvements. Monthly WE meetings were to follow. Minutes for these meetings were recorded. The early meetings were concerned with the setting up of steering WE committees, and the drawing up of a "code of conduct." (See Exhibits 2 and 3.) Training of key personnel was completed by April 1983. Those leading in forming sectional WE committees were the security, accounting, housekeeping and laundry departments. Other departments seemed to Mr. Chua to be dragging their feet. SOME RESULTS By July 1983, the stalemated job enlargement exercise was brought under the umbrella of the WE program. Revised job descriptions, made possible by employees taking on a wider range of job duties, were submitted by departments. Progress was also seen in the widening range of topics discussed by the WE steering committee. By October 1983, the meeting agenda had moved beyond the problem of setting up WE committees to issues including incentive schemes, operational hours of the cafe, j.ob training, time cards for middle management, salary adjustments and second-tier wage adjustments (a merit scheme operating in Singapore). Because the NPB consultant felt that the meetings were proceeding well, he no longer attended meetings. CPSSs early efforts did not go unrecognized - it was one of the six recipients of the first Productivity Award given by NPB. (See Exhibit 4 for criteria.) This recognition was to foreshadow other improvements at the hotel. 2The National Productivity Board (NPB) is a statutory body charged with the responsibility of the implementation of productivity efforts. Among its activities were the conducting of extensive training courses for management and supervisors. It also promotes specific productivity programs like Quality Control Circles and joint labour-management consultation schemes like the work excellence committees.
  5. 5. Page 5 9A86C043 Dahak Ibrahim, chairman of the branch union at the hotel, noted at a national work excellence convention in mid-1984: Improvements in efficiency have not been confined to the hotel operation. Labour-management cooperation has also resulted in improved benefit and welfare schemes. Less time is spent on grievances - we used to have monthly grievance meetings. I have found our colleagues also more open and accepting of changes. At this same convention, it was reported that there were seven department WE committees, 21 sectional committees and 197 WE committee members in the Sheraton. Employee numbers had been decreasing even in years when the occupancy rates were increasing. In August 1985, the staff complement was down to 504 persons. Despite Mr. Chuas attempts to maintain a low profile on CPSSs productivity efforts, there was pressure to share their experiences through talks and conferences. As the word of their successes spread, CPSS also increasingly received visitors anxious to learn about the productivity movement. QUALITY CIRCLE ACTIVITIES The QC program was started in February 1982, at the suggestion of Mr. Zimmer, then Sheratons Resident Manager, upon his return from a seminar on quality circles organized by the Singapore National Employers Federation. Workshops were organized for QC facilitators and leaders. By August, Sheratons pilot circle, "The Searcher," was in operation in the Laundry department. After two months of activities, it made its first presentation to management as part of the activities for "Productivity Month." After this presentation, enthusiasm was high. Other circles formed were "The Adventurer" in Security, "Homemaker" in Housekeeping and "Improve the QCC" in the kitchen. However, by July 1983, Mr. Chua noted that attendance at QC steering committee meetings was falling off. By then the WE program was also in operation. CPSS also participated in other activities to support government-promoted programs. Among them was the "Use Your Hand Exercise" (see Exhibit 5), organized on a fortnightly basis from November 1983. Sheraton also took an active part in the "Courtesy Month," the "Productivity Month," and the "Save Water Campaign." There were other activities more specific to the hotel - the "Ken Fixit" program (a preventative maintenance program specifically for guest rooms), the Preventative Maintenance Program (with a more general focus on all equipment) and the Training and Rewriting Procedures Program (aimed at simplifying procedures and reducing the volume of paper work).
  6. 6. Page 6 9A86C043 Interest in QC activities continued to fall. One QC leaders meeting which was to have been held had to be cancelled due to poor response. The problem of low enthusiasm with QCs was discussed at WE meetings and the decision to continue activating interest in QCs was adopted. More QC leaders were trained in April 1984, and a QC workshop was organized to keep the QC effort alive. Meanwhile, Mr. Alex Kuenzli, a Swiss hotelier whose last posting was in Mauritius, had succeeded Mr. Zimmer as the Resident Manager. He commented in hindsight about QC activities. It would have been better if we had the organization structure first to support small group participation activities like quality circles. We started the QCs first, which was then followed by the work excellence committees. If-we had proceeded the other way around, it is likely that we could have sustained interest in QCs longer. SOME CONCERNS The Changing Hotel Industry While the late 1970s and the early 1980s saw an increasing number of tourist arrivals and optimistic predictions which led tothe overbuilding of new hotels, the tide was beginning to turn by 1984. A sense that the growth momentum was coming to a halt and that harder times were ahead was already prompting the management at CPSS, more experienced than other newcomers in the industry, to take steps to plan for the change. By mid-1985, their fears were becoming fact. Room occupancy at CPSS fell to an all-time low of 63 per cent, a drop from 80 per cent in 1984, and 75 per cent in 1983, and even poorer occupancy rates were forecast for the industry. In spite of the current uncertain economic situation and competition (which Mr. Kuenzli described as "like a jellyfish"), he had confidence that CPSS had a better chance than many others of surviving the recession. His hotel had adopted the policy of reducing manpower by attrition and of increasing productivity through the programs managed by Mr. Chua. The improved labour-management relations had enabled the hotel to function with less staff, but with no apparent drop in performance. Mr. Kuenzli noted with pride that the staff managed the increased occupancy in 1984 well, even though there were 100 fewer people to do more work. Mr. Kuenzli explained: The WE committees are now part of the solution to the current situation. We are hoping that the improved understanding of the employees achieved through our efforts in the last few years will help us meet the competition in further lowering costs and providing better service.
  7. 7. Page 7 9A86C043 No, I am not impatient at what appears to be long discussions over issues in these committees. I can sit through them as well as anybody else. The difference I see between Singapore and German labour- management cooperative efforts is probably one of degree of commitment. Issues discussed here in Singapore tend not to be as petty. And there is just that much more enthusiasm. We also try to keep employees informed about the hotels economic performance. This is done through briefing sessions which .I personally conduct, and which are specially scheduled for staff of different departments. All hotel employees are invited to attend. Sometimes members of the audience, not so fluent in English, may not exactly follow all I am saying, but.they appreciate the trouble I am taking. Afterwards, they may get an explanation from the others about what I have said. At the session for the general administrative staff held on July 18, 1985, Kuenzli started off the meeting by expressing his confidence that the CPSS would continue to succeed despite heavy competition (which he admitted was reaching a stage where even he was beginning to be somewhat apprehensive). He informed members present about a 14 to 15 per cent drop in occupancy rates for gazetted hotels. due to the decline in tourist arrivals. Charts of the hotels economic performance were presented, as were figures of the planned versus actual gross operating profits. Mr. Kuenzli emphasized that despite the cost savings of S$800,0004 as a result of declining staff strength, there was a shortfall from loss in the budgeted gross operating profit. He also mentioned the loss leaders in the hotel. Members at the meeting were briefed on the hotels latest efforts at boosting sales, and given an update on the opening of the new Sheraton Towers and its possible impact on the Century Park Sheraton. Though Sheraton Towers was positioned at the top end of the exclusive range in hotels, its room rates quoted during the opening period were competitive with Century Park Sheratons rates. Demands on middle management Mr. Chua, an unassuming man with an infectious enthusiasm, described the pressures on the management of the hotel in the implementation of a participative philosophy. JHotels which met the evaluation scheme for luxury. 4Cdn$480, 000.
  8. 8. PageS 9A86C043 We try to manage by example. It means that we are tough on keeping manpower costs down within our own departments. For example, the personnel department runs on a staff of three, including myself. We encourage our managers to pitch in whenever necessary. Mr. Moser, our Food and Beverage manager, will help to clear tables; Mr. Kuenzli set an example by even washing toilets - we have that on video! I am glad to see our management staff pitching in spontaneously. Ironically, an indirect measure of our success is perhaps reflected in the fact that it is becoming increasingly difficult to recruit management people from outside this hotel who can meet the demands of the job. People from within the ranks of this hotel seem better suited for management positions. We have tried quite recently to employ a few management personnel from other hotels, but found that these newcomers experienced some difficulties in adjusting to our organization. Our high expectations of management personnel make even our own employees feel somewhat apprehensive about accepting management positions within the hotel. Mr. Kuenzli echoed this view: I do not mind admitting that I am rather demanding of my managers, more so than of the rank-and-file. I expect each manager to work at labour-management cooperative efforts even if he meets with little enthusiasm from his department and feels discouraged about his attempts. FUTURE DIRECTIONS FOR LABOUR-MANAGEMENT RELATIONS Reflecting on the past few years, Mr. Chua wondered what steps he could take to ensure the continuing success of the programs and to move to a new level of commitment and involvement. There are increasing challenges ahead. I am a little apprehensive that some among us feel that we have arrived at labour- management efforts for the hotel. Winning the productivity award and having many people. interested in studying our success may have lulled us into thinking that all is well. We have to push forward in order not to fall behind. Besides, we must plan now to be ahead of the. competition in labour-management cooperation, which means that we should be pressing towards getting our employees involved in making decisions in the hotel. Are we ready for this next challenge?
  9. 9. Page 9 9A86C043 I also think our promotion of the WE committees detracted from the quality circle movement, when actually these activities should be complementary. Ideas for improvements can be generated by these circles, and then channelled through the WE committees. I would like to see a revival of interest in quality circles. While I appreciate the top managements acknowledgements of my efforts, I think it is not quite right that I should be needed to keep enthusiasm high for the program. I noticed upon my return after having been away for a few weeks last year that there was a slight falling off of activities in my absence. This should not be so. A truly successful program should be independent of particular individuals ... and that should also be part of our next objectives.
  10. 10. Page 10 9A86C043 Exhibit 1 SIMPLIFIED ORGANIZATION CHART SHOWING REPORTING RELATIONSHIPS ANA Hotels (Singapore) Ltd. I General Manager Resident Manager I I I I I I Sales Public Personnel Laundry Front Accounts Relations & Office Training Purchasing Security Engineer Executive Food & Housekeeping Beverage
  11. 11. Page 11 9A86C043 Exhibit 2 AN ABRIDGED VERSION OF THE CONSTITUTION FOR WORK EXCELLENCE COMMITTEESJ. CONSTITUTION FOR WORK EXCELLENCE COMMITTEES 1. Work Excellence Committee 1.1 It is a committee within an organisation, made up of management and employee representatives for joint consultation. Joint consultation, in its simplest form, is an arrangement to enable management and employee representatives to come together. to discuss work-related issues to improve the overall effectiveness of the organisation as well as the well-being of the workforce at the enterprise level. 2. Purpose of the Work Excellence Committee 2.1 The primary purpose of WE Committee is to build a harmonious labour- management climate within an organisation to achieve the organisational goals. 3. Objectives of the Work Excellence Committee 3.1 To create a congenial climate throughout the hotel. 3.2 To encourage labour and management to discuss and co-operate on work-related Issues. 3.3 To foster trust among all employees. 3.4 To instill a sense of pride, dedication and commitment to work. 3.5 To promote mutual respect, understanding and team spirit. 3.6 To involve employees in planning, problem solving and information sharing. 3.7 To promote teamwork and advise on small group activities, e.g., QC Circles in the hotel. 3.8 To provide employees with social, cultural and recreational programs. 4. Functions of Steering Committee 4.1 To advise other WE Committees and sub-committees. 4.2 To give guidelines and direction for other WE Committees to operate and function. 4.3 To have consultation between management and union employee representatives at the highest level. 4.4 To initiate the setting up of WE Committees in the whole organisation and co- ordinate their activities.
  12. 12. Page 12 9A86C043 Exhibit 2 (continued) 4.5 To monitor the progress of WE Committees and sub-committees. 4.6 To deal with whatever problems that may arise affecting the whole organisation. 4.7 To initiate programmes that affect the whole organisation. 4.8 To monitor the industrial relations climate in the whole organisation. 4.9 To explain to employees the rationale of policies and activities to the companies. 5. Composition of WE Steering Committee 5.1 The committee comprises of representatives from the management and labour, preferably with equal number from each side. 5.2 The management representatives are appointed by the General Manager while the Union representatives are appointed by the Union. 5.3 The Chairman shall be selected by the WECo The Chairman will appoint a designate who will chair in his absence. 5.4 The term of office of the Committee members shall be three full years. 6. Secretariat 7. Meetings 8. Duties and Responsibilities 9. Attendance by other persons10. Code of Behaviour11. Publicity12. Amendments to Constitution
  13. 13. Page 13 9A86C043 Exhibit 3 DIAGRAM 1: CENTURY PARK SHERATON SINGAPORE WORK EXCELLENCE ORGANISATIONAL STRUCTURE WE UNION STEERING (GENERAL MANAGER) REPRESENTATIVES •••• _ COMMITTEE RESIDENT MANAGER (8) (18) DEPARTMENT HEADS (9) SUPERVISORS (35) SECTIONAL WEC EMPLOYEES (.73) (92) KEY -I -----7 DIRECT INVOLVEMENT COMMUN .CAT ION FLOW FRAMEWORK OF ORGANISATION CHART
  14. 14. Page 14 9A86C043 Exhibit 4 NATIONAL PRODUCTIVITY AWARDS 1985The National Productivity Council will once again be considering nominations for the NationalProductivity Awards this year. The Awards, introduced in 1983, are presented annually toorganisations in recognition of their good productivity practices.The following guidelines are used in the selection of companies for the Award:• A companys training tradition or efforts to train and develop staff.• The state of labour-management relations in the company and the existence of cooperation mechanisms such as Work Excellence Committees.• A companys management philosophy which draws out the best in their people and includes respect for individual excellence within the context of teamwork as well as respect for work discipline.• The efforts put in by the company to enhance employees loyalty and identification with the company through various measures, e.g., company welfarism, promotion programmes such as 3Ps, in-house newsletters, etc.• Worker participation activities of the company, e.g., small group activities like QC Circles.• Good occupational safety and health record and work environment.• A companys efforts in quality and in mechanisation, automation, computerisation and other improvements in technology.Organisations interested in the Awards can write to or call Miss Judith Choo of the NationalProductivity Awards Secretariat, National Productivity Board, 55 Cuppage Road #08-16,Cuppage Centre, Singapore 0922, tel. 7345534 ext. 293.Published by NPBSingapore Productivity NewsJune 1985
  15. 15. Page 15 9A86C043 Exhibit 5 Helping Hands--------- Laundry Manager, Richard Kooi, Recently, a burst steam pipe in the receiving helping hands and brooms laundry department created a mini from colleagues when all pulled up crisis because it started to flood the sleeves and cuffs to help curb the basement. The situation called for flood. quick, decisive action and flood The water was bailed out in a little fighters. over 30 minutes. Q Personnel Director Chua Soon Lye; Laundry Manager, Richard Kooi and Front Office Manager, Sam Tay up to their knees in work. •
  16. 16. Richard Ivey School of BusinessThe University of Western Ontario IVEY 9B06M083ING INSURANCE ASIA/PACIFICAndreas Schotter wrote this case under the supervision of Professors Rod White and Paul Beamish solely to provide material forclass discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. Theauthors may have disguised certain names and other identifying information to protect confidentiality.Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction ofthis material is not covered under authorization by any reproduction rights organization. To order copies or request permission toreproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University ofWestern Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.Copyright © 2006, Ivey Management Services Version: (A) 2006-09-14In June 2003, Jacques Kemp, newly appointed chief executive officer (CEO) of ING InsuranceAsialPacific (ING AlP) was reviewing the regional operating structure, performance, and growth strategy.After arriving in Asia in July 2002 as regional general manager, Kemp traveled extensively throughout theregion, in order to gain many insights into the existing ING AlP organization, the individual business units(countries) and their. strategies. He also solicited ideas from major consulting firms on how to furtherstrengthen ING AlP. The company was doing well, but he felt that lNGs existing market position; strategyand operations in AsialPacific could be enhanced.Kemp was concerned that ING needed to prepare for the time when the general market growth in Asiaslowed and the competitive pressure intensified. He also was determined to make a difference during histenure as lNGs AsialPacific chief executive officer and to take the company to the next level.INTERNATIONAL NETHERLANDS GROUP (ING)ING was a global financial services company of Dutch origin, with more than 150 years of history. Thecompany provided an array of banking; insurance and asset management services in more than 50countries. With over 120,000 employees, ING served a broad customer base, including individuals,families, small businesses, large corporations, institutions and governments. Based on marketcapitalization, LNG was one of the 20 largest financial institutions globally and ranked in the top lOinEurope. The company was organized along six major business lines, which included both regions andproduct groups. While the banking business was divided into wholesale, retail and direct banking with aglobal management structure, the insurance business was organized into three regional business lines,including the Americas, Europe and AsialPacific (see Exhibit 1).
  17. 17. Page 2 9B06M083JACQUES KEMPJacques Kemp started his career on the banking side ofING in 1974, in risk management at a local officein the Netherlands, and later moved to the foreign division at the head offices in Amsterdam. He wasinvolved in setting up the ING Los Angeles office in 1982, and from 1984 to 1990, he was generalmanager in Brazil. In 1990, he returned to Amsterdam to take a general manager position, and one yearlater, became chairman of ING Bank International. One of his main achievements was the set-up of theemerging market banking network. After the merger and integration with Barings Bank in the mid-1990s,he became a member of the executive committee with responsibility for lNGs general banking activitiesand the international banking network worldwide. In 2000, Kemp became Global Head of e-Business forING Group, and was responsible for initiating and coordinating lNGs strategy on Web-enabling,integrated financial services on a global basis. He joined the executive committee of ING InsuranceAsialPacific in July 2002 and became CEO for AsialPacific on April 1,2003.THE INSURANCE INDUSTRY IN ASIAThe insurance industry in Asia was expected to expand dramatically, driven by rapid economic growth anda general increase in the popularity of insurance products, resulting from rising incomes. Gradualderegulation and the opening up of the Asian insurance markets were making them increasingly accessibleto foreign insurers.The proportion of gross domestic product (GDP) accounted for by life insurance premiums in Asia wasrelatively high when measured against income levels. The demand for life insurance in Asian markets wasgreater than in other countries at a comparable stage of development. Japan and South Korea, in fact,displayed the second- and third-highest degrees of insurance penetration in the world.There were several reasons for the popularity of life insurance in Asia. Life insurance (like every otherform of saving) profited from the high rates of saving in Asia. In this respect, insurers in some Asiancountries had stolen the march on the banks by intensively marketing whole life policies. 1 Further, in mostAsian nations, state or company pensions were modest, and private insurance products filled the gap. Lifeinsurance enjoyed slight tax advantages in most Asian countries. Premium volume in Asia (excludingJapan) was expected to experience real growth of more than 10 per cent per year between 2003 and 2008.Global premium volume was expected to increase by about four per cent during the same period.At the end of 2002, approximately 900 insurance companies (about 265 of them foreign) were operating in 12 Asian insurance markets. The size of the companies, their capital assets and the share of the market inforeign hands varied considerably from country to country. Regulations on the part of the supervisorybodies also had highly varying effects on market activities. The liberal regulations of Hong Kong ensuredadherence only to minimum capital regulations, while the additional (and in some cases far-reaching)regulations of other countries covered the licensing of companies, products and prices. However, underpressure from the World Trade Organization (WTO), these Asian markets were expected to become moreopen.1 Unlike term insurance which only paid out when the principal died (or was disabled); whole life policies had an insurancecomponent and a savings component.
  18. 18. Page 3 9B06M083ING IN ASIA/PACIFICING Insurance AsialPacific was responsible for the life insurance operations and asset/wealth managementactivities of ING throughout Asia Pacific. ING was the first European company to enter the life insurancemarkets of Japan, Taiwan and South Korea. By the beginning of2003, ING was ranked among the top fiveforeign financial services providers in AsialPacific with more than six million clients. The portfolioconsisted of large businesses across six mature markets -AustralialNew Zealand, Taiwan, Malaysia,Hong Kong, Japan and Korea - some smaller, semi-mature markets, such as the Philippines andSingapore, as well as newly emerging life insurance markets, including China, India, Indonesia andThailand.ING Insurance AsialPacifics business units offered various types of life insurance, wealth management,retail and institutional asset management products (including annuity, endowment, disability/morbidityinsurance, unit linked/universal life, whole life, participating life, group life, accident and health, term lifeand employee benefits) and services (see Exhibits 2 and 3). In Hong Kong and Malaysia, non-lifeinsurance products (including employees compensation, medical, motor, fire, marine, personal accidentand general liability) were also offered. ING Asia/Pacifics distribution channels included tied or careeragents, independent agents, financial planners, bancassurance. telemarketing and e-business channels. Inseveral countries, ING had strategic alliances with local companies to enhance distribution capacity.In 2002, several regional shared service centers were established to lower operating costs. With 60,000points of distribution in Asia, ranging from tied agents, independent agents and brokers/dealers to banks,lNGs strategy was able to access its clients through the channel of their choice.ING had leading positions in Australia, Taiwan, Korea and Malaysia, and it was a fast-growing nicheplayer in Japan. In New Zealand, ING managed about 16 per cent of all mutual funds, making it thenumber-three player in terms of assets under management. ING was well positioned in the two largestAsian growth markets, China and India. It had two joint venture operations in life insurance in China and a44 per cent stake in ING Vysya Bank, Indias fifth largest private bank, as well as a life insurance jointventure and a mutual funds business.ING was doing well in Asia Pacific (see Exhibit 4). Although 2002 was marked by continuing declines inglobal equity markets, the aggregate financial results of ING AsialPacific showed robustness against thismarket volatility. ING AsialPacifics regional results exceeded its financial expectations for the year withthe businesses in Australia, Japan and Korea delivering the most outstanding results.THE AETNA INTEGRATIONBy 2003, the integration of Aetna, a major acquisition undertaken during 2000, was accomplished, andrebranding was completed in almost all countries. This challenging integration was the major achievementof Kemps predecessor.ING Group acquired the life insurance activities of American-based Aetna International, which at the timehad a much stronger position and an insurance organization that was four times larger in Asia than ING.The integration caused the departure of many of Aetnas top managers but there were also examples ofnon-disruptive transitions, such as the one in Hong Kong, where the local general manager of Aetnaembraced the opportunities provided by the merger and led the local joint operation to become the most2 Bancassurance is a French term referring to the selling of insurance through a banks established distribution channels.
  19. 19. Page 4 9B06M083recognized foreign financial services provider in Hong Kong. Overall, the business remained strong, andING AsialPacific benefited substantially from the Aetna acquisition. The merger helped ING became oneof the largest life insurance companies in Asia-Pacific.To rebalance the portfolio, ING sold its life and non-life operations in the Philippines, Singapore andIndonesia. ING felt these three countries would not produce enough "substance" in premiums to allowforeign insurance companies to make decent returns and profits, and the business units in these countrieswould need huge amounts of resources to manage these markets properly and to meet INGs standards ofrisk and compliance. Strategically ING decided that it had enough substance and growth potential in theother 12 Asian countries in which it operated while retaining the asset management operations in thePhilippines and Singapore.REGIONAL STRUCTUREING AlPs activities were organized by business units (countries). The regional office in Hong Kongfulfilled the role as monitoring center. The regional goal was to be a top player in the key markets ofAustralia, Hong Kong, Japan, Korea, Malaysia and Taiwan, while further developing the major growthmarkets of China and India. What this goal meant and how it could be achieved was left largely to the localcountry business units.Individual business units (countries) had a relatively high level of autonomy. This culture created a veryentrepreneurial environment, but also some frictions between the regional office in Hong Kong and thecountry business units. The functional managers at the regional office had difficulties maintaining commonstandards across the region, As one regional office manager stated: All business units have different ideas, standards and priorities. It is hard to keep track of activities, especially since the business unit managers only report to the regional managers and not to us, who are supposed to be in charge for the coordination of the operational activities.The region was divided into four country clusters, each under the nominal supervision of either one of tworegional general managers or one of two executive members who then reported to the regional CEO (seeExhibit 5). The regional CEO reported directly to the chairman of the executive committee. The regionaloffice had several regional office professionals reporting to the chief of staff, including actuarial staff, thecontroller, as well as professionals engaged in the areas of legal issues, compliance issues, informationtechnology (IT), investment product development, human resources (HR) , E-business, security andfinance. The chief of staff, the executive members and the regional managers were part of the regionalmanagement committee. The regional functional department managers did not have direct responsibilityfor their respective counterparts within each business unit. For example, the IT manager in Thailandreported to the Thailand country manager, not to the regional IT manager. The regional IT managerreceived information from the country manager by request.The individual business units varied greatly in terms of their internal organizational characteristics andoperating styles. Some business units, like Taiwan, Japan and Hong Kong, were organized along productlines. Other business units were organized as "do it alls," such as Australia, which marketed itself as a totalfinancial solution provider. In each country, the local management followed their own instincts. There wasno corporate-wide approach. By and large the units were successful, and the potential benefits of a morecommon approach were rarely explored.
  20. 20. PageS 9B06M083KEMPS SIZE-UPAlthough the latest results had been solid and ING Insurance AsiaJPacific appeared to be doing well,something bothered Kemp. During off-site meetings, where the senior line and functional managers of theregional office and the local business units discussed, what could be improved to get to better performance,Kemp received clear calls for better coordination between the regional office and the individual businessunits. The executives asked specifically for more aligned plans and procedures, improved communication,and more delegated authority (see Exhibit 6). There was a clear belief that a detailed roadmap was neededto get things done. Kemp pondered: Would it be an operating model, a business model, or a process framework and whatever the name, where can I find it. Could the head office provide me with one; or perhaps I should try to involve consulting firms?Regional reports were characterized by a multitude of different formats, which made comparisons difficult.Functional heads at the regional office spent several days each month preparing consolidated presentations.Business unit managers defined their own performance benchmarks and agendas for regional meetings. Asthe chief of staff recalled: Sometimes it appears that we speak totally different languages and that nobody understands one another. This is frustrating for us at the regional office and I believe that this is the reason why the business unit managers do not really buy into ideas proposed by the regional offices functional groups.Kemp sensed the difficulties with, the existing level of organizational heterogeneity. Strategic objectiveswere set according to business unit preferences and they were not formally aligned with regional strategy.Pay for performance was difficult to implement, since results were reported in local formats and notmeasured against group benchmarks. Local marketing campaigns did not always reflect existing corporateidentity standards. In fact, many business unit managers did not even know the current corporate standards.Each country had its own ideas where the best business opportunities could be found, and thought its ownmarket was special. Consequently, it was difficult to identify commonalities across the region. As Kemprecalled from some of the feedback that he received during his initial tour of the region: There are no clear mission statements, despite that every country wants to be the leader in something. For example India wants to be the leaderin asset management but without presenting a clear plan, outlining how to get there with for example acquisition, organic growth or through partnerships and what this means for the organization, marketing and so on.Another problem was the ambiguity in terms of the roles of the managers at the regional office. Themanagers knew their titles but nobody was really clear how the roles, tied into the operational structure.During the last couple of months, Kemp heard many times the question: "What is the actual function of theregional office?" This issue caused frustration especially with the functional managers at the regionaloffice who felt disconnected from the operations ofthe business units.As Kemp observed:
  21. 21. Page 6 9B06M083 Strategic actions are mainly characterized by reactions and less by planning. As the new CEO I have to handle all kinds of strategic plans for the various business units, most are different, inconsistent, incomplete, not aligned with the overall goals of lNG, and short of details and specifics,. I am therefore wondering what is the "better" way for getting from strategy to execution. I have checked the literature, I checked with consultants and my own study papers and I have not come across any solid and pragmatic operating model or framework for getting close to what I think we need. THE CONSULTANTS Kemp exchanged ideas with several top international consulting firms, including McKinsey & Company,. Monitor, and BostonConsuiting Group (BCG) about ING Insurance AsialPacifics situation. The inputs were initial overviews and not detailed analyses, but Kemp wanted to get a feeling for the thought processes of these firms and whether it would be worthwhile to engage one of them for follow-on work. Each firm identified different key issues (see Exhibit 7). McKinsey & Company identified strategic portfolio management and pro-active human resource management as the key areas for improvement. Kemp could see the importance of these issues but he noted the lack of marketing and operational recommendations. For him, the proposal did not get to the day- to-day operational issues. He did not see how a different approach to HR management could solve the operational issues that he had already identified. He believed that ING Insurance AsialPacific had a great talent pool and that HR management could not be the only key driver for further improvement. Monitor Group, on the other side, focused on branding as the key driver for improvements in all areas, including, finance, HR, sales, marketing, manufacturing and operations, distribution and research and development (R&D). Kemp was aware of the importance of branding, which, in fact, was a core strength of ING globally. However, he did not think that branding could or should overwhelm the other key drivers for success.BCGs proposal focused on building professional capabilities and identified six functional categories inwhich capabilities should be improved or developed. These categories included strategy and businessplanning, sales and distribution, products and marketing, finance management, operational processes andinfrastructure, and human resources and organization. Kemp liked the approach of BCG but he still notedthe lack the important issue of reputation management and compliance. Like the other consulting firms,BCG applied a generic framework to ING. Kemp still thought that the solution was detached from INGInsurance AsialPacifics specific operational issues. After all, the company was doing well, so ifhe starteda change process, he needed the full support of his team; and the consultants proposals, though interesting,did not provide a clear pathway for involving ING Insurance AsialPacifics managers.Kemp summarized: Even if BCG gets the closest, the model lacks completeness and comprehensiveness (specific operational drivers). It is also incomplete in that it does not follow through with clear "objectives and key performance measures." For me it comes to the question how to . get from strategy to execution, especially in an aligned way and how to list and connect all the "dots" needed to build (and keep building) a "lasting" and efficient organization. Most models talk about it but do not give me a framework to connect the "dots" with tools like
  22. 22. Page 7 9B06M083 for example pay-for-performance, knowledge-management, intra-firm communication, or planning and auditing.Another problem for Kemp was the regular disconnect between the functional managers at the regionaloffice and the business unit managers in the countries. He believed this lack of coherence createdinefficiencies and potential vulnerability for the entire organization.Over the years, Kemp had always been interested in the management literature. He met many of the topstrategists in .industry and academia at conventions and seminars. He particularly liked the idea of"managing managers," which to him was a key gap in the existing management literature. He thoughtleaders should build organizational capabilities and the internal discipline to help everyone in theorganization to excel. He did not want to add complexity, a pitfall he believed many leaders fell into whenrestructuring organizations. He believed that strategy, and strategic thinking, while important, could onlybe as good as its implementation,Kemp had always felt inspired by Alfred Sloans restructuring success of General Motors in the 1920s and1930s. When Sloan took over GM, he inherited an amalgamation of independent, entrepreneurialcompanies assembled by his predecessor, William Durant. Sloan saw that the strategies of the businessescould be made more coherent and that the entire organization could be more efficient by building systemsto manage the managers. At the time, Sloans approach was revolutionary.Kemp pondered over the consultants proposals and his own ideas and he wondered how to create acoherent strategy, which could be executed by the entire organization. He was determined to present hisconcept at the next executive committee meeting in two weeks time but he had to decide where to focus(see Exhibit 8).
  23. 23. Page8 9B06M083 Exhibit 1 ING GLOBAL BUSINESS LINES AND SHARES I Supervisory Board I I Executive Board I I I I I I I Insurance Insurance Insurance Wholesale Retail ING Direct Americas Europe Asia/Pacific Banking Banking ING Direct 7% Insurance Europe 22% Retail Banking 20% Wholesale Banking 24% Insurance Asia/Pacific 5%Source: ING AsiaIPacific
  24. 24. ) Page 9 9B06M083 Exhibit 2 ING ASIA/PACIFIC INSURANCE PRODUCT OFFERINGS Whole Critical United Linkedl Variable General Group Country Term Endowment Health Life Illness Universal Life Annuity Insurance Insurance Australia 0 x x x 0 0 x 0 0 China.PALlC 0 0 0 0 0 0 x )( 0 China.ICLlC2 0 0 0 0 0 0 x )( 0 Hong Kong 0 0 0 0 0 ,0 x 0 0 India 0 0 0 x 0 0 x x 0 Japan 0 0 0 0 0 x 0 x 0 ING Life Korea 0 x 0 0 0 0 0 )( 0 KB Life Korea )( x x x x 0 x x 0 Malaysia 0 0 0 0 0 0 x 0 0 New Zealand 0 x )( 0 0 0 x )( x Taiwan 0 0 0 0 0 0 0 0 0 Thailand 0 0 0 0 0 x. x )( 0 Indonesia 0 0 0 0 0 0 )( 0 0 Singapore x x x 0 x x x 0 x The x x x x 0 0 [if 0 0 PhiliDDines Notes: Group insurance covers aI/ types of products. Education plans are considered as endowment plans. Universal Life products are offered in Korea and China. Hong Kong offers both universal life and unit linked products. In Taiwan, General insurance only includes travel insurance products. ING does not currently have insurance operations in Singapore, Indonesia or the Philippines. Source: ING AsialPacific 1 50/50 joint venture operations in life insurance with Pacific Antai Life (PALlC) in Shanghai. 250/50 joint venture operations in life insurance with Beijing Capital Group in the northern city of Dalian. The new joint venture was known as ING Capital Life Insurance Company Ltd (ICLlC).
  25. 25. Page 10 9B06M083 Exhibit 3 ASSET MANAGEMENT PRODUCT OFFERINGS Business Unit Product Offerings Australia Australian equities and fixed income, Diversified (balanced) funds, International equities & fixed Income, Multi-manager (Optimix), Private equity, Global property securities and Global hiQh dividend China Equity funds, Balanced funds and Bond funds Hong Kong Asian equities, Hong Kong equities & fixed income, Asian & Emerging Market debt, Proprietary equities and fixed income India Equity funds, Balanced funds and Bond funds Japan Japanese bonds and equities, International bonds and equities and Balanced funds Korea Domestic Korean bonds and equities, Offshore funds and Balanced funds Malaysia Proprietary domestic equities & fixed income, Unit-linked insurance investment products, Discretionary investment mandates, Corporate / residential mortgage loans and Domestic real estate New Zealand Domestic and International fixed income and equities Philippines Balanced funds, Advisory services, Peso fixed income, Domestic equities, Philippines USD bonds, Deposits, Securities and structured product offerings Singapore Offshore mutual funds, Singapore $ bond funds, ASEAN equity funds, Institutional discretionary mandates Taiwan Domestic Taiwanese equities, fixed income & balanced investments, Localized versions oflNG global products, Discretionary account management and Offshore funds of various labels Thailand Mutual funds, Property funds, Real estate investment trusts, Private funds and Provident funds Indonesia ING Investment Management AlP does not have asset management business in IndonesiaSource: ING Asia Pacific
  26. 26. Page 11 9B06M083 Exhibit 4 ING ASIA/PACIFIC FINANCIAL OVERVIEW Figures in Euro million 2002 2001 Change Premium Income 7,798 6,497 20% Annual Premium Equivalent 1,283 1,395 -8% Underlying Profit before Tax 324 281 15% Value of New Life Business 280 247 13% Internal Rate of Return 15.4% 14.9% 3% Assets under Management 37.3 25.6 46% (€ billion)Source: ING Asia/Pacific
  27. 27. Page 12 9B06M083 Exhibit 5 ING ASIA/PACIFIC ORGANIZATION CHART PRIOR TO APRIL 2003 EXECUTIVE COMMITTEE Chairman Executive 1 Executive 2 I Regional CEO " I I I I I I EC Member" I -1 EC Member" r1 General Manager •• r1 General Manager" I I Chief of Staff ,. Executive Japan I Taiwan (Country Manager) Korea Life - Executive H Australia (Country Manager) I ING Life - Life - Executive ""- HCB - Executive Re,glonal Office Professionals Actuarial (Country Manager) Executive Aetna Heiwa Life Funds - Executive Cards - Executive Indonesia Life/MedicalNon Life H Malaysia (Country Manager) I - Executive CFO Executive ING Principal Pensions Hong Kong (Country Manager) (Country Manager) y India (Country Manager) I Executive Controiler Executive ING Funds •...... Life - Executive Pensions - Executive ---f Thailand (Country Manaqer) Executive Executive Non Life - Executive Legal Executive China ---f Philippines (Country Manager) - Sonja Key (Country Manager) Compliance -- PALIC (Shanghai JV) Executive Executive IT Executive Executive Investment Products Executive HR/MD Note Executive E-Business Executive Security - TBA Source: iNG Asia-Pacific
  28. 28. Page 13 9B06M083 Exhibit 6 JACQUES KEMPS KEY ISSUES Sounds familiar. .... ? Question: HOW??Source: ING AsiaiPacific
  29. 29. Page 14 9B06M083 Exhibit 7 THE CONSULTING PROPOSALS The Problem: Consultants Have Their Own Ideas ><. I! $W K" r- ,,;; t"w"~ ·ll.;~""4,N.p:....f~;nW c;» r;.1JUHm ·"1O;:t!"l{;;;f#:l.i.CI:.;.l::ttJfJf~ ~~; ~-if¥"~ ~~ 1," CD -~ -.~ ca • Focus on business portfolio • Branding is the driving force for • BeG: 6 functional categories, in management all processes which capabilities should be • Human resources seen as built fundamental Issue: Issue: Issue: Vital tunctions such es Bmm:!!ng snouk! II(~ considered Rep!lmtfotl m:magement marketillg ,"IIld operations ere In most prccesse«, but not as (if/elm/illY COmpifAI1Cei Is stiff mfssil19! tile dnver of eve! vthfHr;( mft;sfllg! 7 ING
  30. 30. Page 15 9B06M083 EXHIBIT 8 THE PROBLEM How to apply the Theory while faced with more and more Issues? mentation ~ iIIIiI ObJec- -f Plannln,,! ~ tives& .KPlsSource: ING AsiaiPacific
  31. 31. Richard Ivey School of BusinessThe University of Western Ontario IVEY 9B09M028SCANDINAVIAN AIRLINES: THE GREEN ENGINE DECISIONJennifer Lynes wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effectiveor ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information toprotect confidentiality.Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction ofthis material is not covered under authorization by any reproduction rights organization. To order copies or request permission toreproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University ofWestern Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.Copyright © 2009, Ivey Management Services Version: (A) 2009-06-11INTRODUCTIONIn the spring of 1995, the five members of the senior management team of Scandinavian Airlines (SAS)were sitting around the boardroom table listening to Bengt-Olov Nas, SAS s director of aircraft and engineanalysis. Senior management were discussing the decision to update the airlines fleet, and Nas had justfinished introducing his specification wish-list for the new fleet of 55 Boeing-737s that SAS was about topurchase.The decision to add or remove aircraft from a fleet is one of the most important to be made within anairline because of both the significant cost of replacement and the long-term consequences that result fromthe choice of aircraft. An average fleet would last an airline between 25 and 35 years. The environmentalperformance of an airline is also strongly related to the age and makeup of its fleet. The type of aircraft anairline chooses to purchase has to serve the airline in the regulatory, market and technologicalenvironments predicted to exist within the life of the fleet. As one can imagine, the decision for SAS wascomplex and involved analysis, prediction and perhaps even a gamble to come up with an aircraft fleetmost suited to the coming needs of the airline. Nas and his team of aircraft analysts had spent several yearsresearching the type of aircraft SAS needed for its new fleet.Unlike cars, the body and engine of large commercial aircraft does not come as one unit. Generally, anairline chooses the aircraft body from one manufacturer and the engine from another. For SAS, while thedecision to buy the Boeing 737 model had already been made, the airline had yet to decide on an engine.After much discussion with aircraft and engine manufacturers, Nas had come up with an option for SAS topurchase a "green" engine for its new fleet of Boeing-737s. This two-stage.dual annular combustor (DAC)engine produced significantly lower NO, emissions and would represent a strong commitment to the futureenvironmental improvement of the airline. However, the DA~ engines -added kr3.5 million I per aircraftonto the total cost of the new aircraft fleet (which was estimated to be krI2 billion). At the time of themeeting, Nas could not provide specific figures on the economic payback of these engines. Forecastersanticipated increased emissions charges and taxes for the European airline industry, however, the future 1 kr:;: Swedish Kronor. At time of print, approximately kr7=CDN$1; kr9=US$1; kr11.5=€1.
  32. 32. Page 2 9B09M028regulatory structure of the industry was too uncertain to make any clear predictions. Nas was presentingthis idea largely on intuition that purchasing these engines would have positive financial payback for SAS,as it minimized the risk of future operational limitations.Nas had only one meeting to convince the management team to. approve the procurement of the proposedDAC engines for the new Boeing-737s.THE AIRLINE INDUSTRYThe airline industry has played a key role in shaping modem society. With 1.6 billion passengers using airtransport each year worldwide, the airline industry has facilitated globalization, both in economic andsocial terms. Passengers are traveling more frequently and for longer distances than ever before. Low-costairlines have also increased the proportion of people that could afford to fly.On a global scale, the airline industry has experienced almost continual growth in passenger numbers. Overthe past 50 years the commercial airline industry has almost consistently sustained positive rates of growth.The industry had gone through significant changes in recent times, including deregulation and increasedsecurity concerns.Airline Industry TrendsThe 1980s were a period of prosperity for the airline industry, however, in the 1990s things started tochange when the industry began to deregulate. In mid-2001, the industry began experiencing an economicdownturn that was further fuelled by the terrorist attacks of September 11, the SARS2 outbreak in Asia in2003 and political unrest in the Middle East. The companies that had kept or increased market share duringthese turbulent times have been those that have best been able to adapt to these challenges.Liberalization of the skies has allowed more airlines to fly to airports that were previously restricted to anations flag carrier. These changes have contributed to the growth of airline travel (by making it lessexpensive for the passenger) but have also increased competition between carriers. Moreover, particularlyin Europe, airlines do not only compete with other airlines but also with other forms of transportation -especially the high-speed railway networks. The past decade has seen a large increase in the number or"low-cost air carriers. These low-cost airlines have forced major national and international carriers tochange the way they operated.To remain in business, many airlines have tried to improve competitiveness through increased efficiency.The resultant strategic realignment and search for resource efficiency has resulted in a consolidation ofdomestic carriers, as well as a movement towards the development of international alliances. Thesealliances allow airlines to share flights and also to optimize connections between international flights.2SARS: severe acute respiratory syndrome.3lATA (International Air Transport Association), "Urgent to get out of financial abyss, n April 8 press release detailing theopening address by lATA director general and CEO Pierre J. Jeanniot to the Airline Financial Summit, New York, April 8,2002.
  33. 33. Page 3 9B09M028The Major Environmental Concerns in the Airline IndustryIt is estimated that 90 per cent of an airlines environmental impact comes from its flight operations (e.g.fuel consumption, air and noise emissions), five per cent from cabin operations (c.g. meal service andcleaning the aircraft cabin) and five per cent from ground operations (e.g. aircraft maintenance andoperation of vehicles on the ground)." Although the rate of CO2 and NO, emissions from aircraft arecomparable to other forms of transport such as road and rail, studies have shown that the impact of theemissions from aircraft at high altitudes are thought to have a global warming effect three times greaterthan on the ground. While there have been significant improvements in aircraft technology over the pastfew decades, the sheer growth in airline travel makes it difficult for the industry to reduce overall aircraftemission levels.Increasingly, pressure has been mounting from governing structures, such as the European Union, for theairline industry to respond to environmental challenges - particularly in the areas of noise and emissions.Growing public awareness of the environment has further encouraged airlines and airports to address theseIssues.Greenhouse gases are an unavoidable part of airline operations. It is a major challenge to seek solutions tominimize aviations climate impact. Although aviation contributes approximately three per cent to globalemissions of carbon dioxide, international flights are currently exempt from the Kyoto Protocol. Thealtitude and distance aircraft travel make it difficultfor emissions from international flights to be attributedto a specific geo-political boundary. Airlines are also unique from other sectors in that they are usuallybased out of one country but operate "cross-nationally" in the sense that they might fly to many countries.Airlines are therefore subject to the regulatory structure of their home base as well as that of each countryto which they fly.Environmental Policy and Regulation for Airlines in SwedenThe regulatory milieu of commercial aviation is complex. In general, the airline industry is governed by acombination of international, federal, regional and local legislation. Although the majority of control hastraditionally been at the federal and international level, local governments have been granted increasedpower in recent years, and many airports have now been privatized. Commercial air transport remainshighly regulated with respect to air traffic control, airspace, safety and security. Internationalenvironmental standards regarding air and noise emissions have been developed by the United NationsInternational Civil Aviation Organization. Exhibit 1 outlines the major environmental impacts ofcommercial air travel. The International Air Transportation. Association (lATA), the industry body of the international commercial aviation industry, has recognized the environinent as a key consideration for the industry by publishing a report for the airline industry that discusses the impacts, the tools being used to improve environmental performance and the challenges facing the industry (lATA, 2000). More recently, it has.created five management positions that focus on the environmental management and performance of the industry.4 SAS Environment Report. 2000.5 J. Penner, D. Lister, D. Griggs. D. Dokken and M. McFarland (eds), "Summary for Policy-Makers: Aviation and the GlobalAtmosphere. A Special Report of IPCC Working Groups.I and 11/in Collaboration with the Scientific Assessment Panel tothe Montreal Protocol on Substances that Deplete the Ozone Layer. n Intergovernmental Panel on Climate Change (IPCC).Cambridge University Press. Cambridge, 1999.
  34. 34. Page 4 9B09M028The government body that deals with aviation in Sweden is "Luftfartsverket," which translates in Englishto the "Swedish Civil Aviation Administration" (Swedish CAA). The Swedish CAA is the governments"expert" in aviation and has the responsibility of ensuring that Swedens interests in aviation are fulfilledon a national and international level. Sweden is a leader in management of environmental impacts relatedto air travel and is one of only two countries (Switzerland being the other) to favour charges in aviation asa tool for encouraging airlines to improve their environmental performance. The Swedish CAA argues thatcharges and taxes are an effective way to get airlines to use the best available technology.The largest airport in Sweden, Stockholm-Arlanda, uses charges and taxes as a mechanism to reduce noiseand fuel emissions. It has even implemented a cap on NOx and CO2 emissions - meaning that once NOxor CO2 emissions reach a certain level, the airport will not allow an increase in traffic flow. This was one ofthe conditions that formed part of an agreement to allow the airport to build a new runway in the 1990s. AsSASs main hub is Stockholms Arlanda airport, this is a significant factor affecting SASs day-to-dayoperations.BACKGROUND OF SAS - THE COMPANYWalking into the headquarters of SAS in Frosundavik, a suburb of Stockholm, there was a feeling of bothserenity and efficiency. Passive solar light and ergonomic furniture were key ingredients to each office.Equality of employees, a fundamental component of Swedish culture, was visibly present; for instance, theoffice of the deputy CEO did not look much different than that of a middle manager.Scandinavian Airlines (SAS) was the largest airline in Scandinavia and had bases in Stockholm, Denmarkand Oslo, serving 32 million passengers per year on domestic, inter-Scandinavian, European andIntercontinental routes. The airline was part of the larger SAS Group, which included. hotels, other airlinesas well as airline support services. The holding company, SAS Group, was 50 per cent state-owned(Sweden 21.4 per cent, Norway 14.3 per cent, Denmark 14.3 per cent), with the remaining 50 per centbeing publicly traded. SAS Group was Europes fourth largest airline group, demonstrating that it was animportant player in the global airline market.The airline had a reputation in the commercial aviation industry for being forward-thinking and hadpioneered such steps as being the first major Western airline to have a female pilot (1969), to offerbusiness class on board its flights (1981) and to have its environmental report audited and verified by athird party (1996). The companys management realized that key issues involved in developing polices,strategies and decision-making were cost reduction, the companys image as well as the ability toanticipate market and regulatory changes and be able to plan ahead of time.The Evolution of Corporate Greening at SASIn 1995, environmental management was elevated to a strategic level at SAS. The environment hadbecome part of the overall policy-making structure for SAS, evident through the establishment ofenvironmental visions and goals and a commitment to publish environmental reports on an annual basis(SAS, 1996). At the forefront of this strategic change was the then-president and CEO, Jan Stenberg.In 1995, Stenberg appointed SASs first environmental director, Niels Eirik Nertun, who, since then, hadbeen an influential player in the role that environmental management had taken in decision-making withinSAS. Once in the position as environmental director, Nertun was able to justify the expense of developingen,:ironmental initiatives such as reporting mechanisms by arguing to upper management that competitors
  35. 35. Page 5 9B09M028such as British Airways were reacting to environmental pressures and big (corporate) customers weredemanding it. A look through SASsEnvironmental Reports from 1995 onwards showed the rapidevolution of SASs environmental programs.Despite the economic downturn of the industry in 2001, the CEO announced in the 2001 EnvironmentalReport that SASs commitment to the environment would remain firm. Since then, however, the .environmental department of SAS had faced cutbacks in economy and staff - albeit no more than otherdepartments within the airline. This had resulted in a reduction of staff from four to two people workingdirectly on environmental issues and an environmental report that, instead of being a separate report (as itwas for seven years), was now integrated into the overall annual report for SAS.Exhibit 2 shows a time line of significant events in relation to corporate greening at SAS, including awardsit had received for its environmental reports, changes in the companys leadership and the evolution of itscorporate environmental policies.Environmental Management at SASSAS had been identified as a leader in environmental commitment by its suppliers and other airlines aswell as by representatives of international organizations such as the Air Transport Action Group andIATA.6 SAS was committed to implementing sound environmental management practices that ensuredminimal environmental impacts, adopting best available technologies as well as commitment to continualimprovement and promoting awareness of environment-related aspects of the industry to external parties.The former CEO of SAS, Jan Stenberg, expressed that the reasons behind this commitment were not solelyidealistic reasons: We believe that companies which have an impact on the environment and ignore their responsibility will disappear from the market within a decade ... A sound environmental profile is profitable. But it is more that that. It is our contribution to a sustainable society and to future generations. .SAS stated in its environmental reports that what was driving it to strive for enhanced environmentalperformance was a combination of ethical principles, economic efficiencies, passenger interest, bettercompany image, and liability concerns of banks and insurance companies, as well as the potential ofgaining a competitive edge. The airline had implemented a comprehensive environmental managementsystem and had introduced a number of tools and mechanisms to report environmental performance. Theseincluded:• Annual public and audited environmental reporting since 1995.• An environmental index that measured economic efficiencies derived from implementing environmental measures, e.g., eco-efficiencies.• Corporate environment policy obligating all managers to conduct an environmental assessment as part of their decision-making documentation. SAS also supported product stewardship programs and would only deal with suppliers who had environmental policies and management systems.• An online emissions calculator for passengers that provided a destination specific calculation of CO2 generated.6 Based on communications with well (former) head of sustainable business unit, British Airways, November 4, ·2002;environmental manager, Qantas, October 17, 2002; executive director, Air Transport Action Group, June 28, 2002; lATArepresentative, June 6, 2001.
  36. 36. Page 6 9B09M028A series of environmental goals, also established in 1995, had been revised over the years and expanded toinclude an "ceo-political vision" (SASs message to environmental policymakers), policy, overall andcommunication goals and strategy. Largely these environmental goals and policies involved:• Achieving profitability while minimizing environmental impact;• Being a forerunner in the development of internal environmental standards;• Desiring various forms of transport to be equally governed by the "polluter pays principle";• Harmonizing production, financial and "qualitative" goals;• Communicating SASs environmental performance and promoting stakeholder discussion;• Increasing environmental awareness throughout the organization by conducting environmental activities at all levels and in all decisions; and• Utilizing the methods that resulted in the lowest possible impact.The leadership role that the CEO, Jan Stenberg, took in making the environment a strategic priority hadhad strong impacts on how SAS managed environmental issues, described the vice-president ofprocurement at SAS: I believe SASs environmental agenda was driven, or at least heavily supported by our previous CEO Mr. Stenberg ... because he was aware of the importance of this. He did very much and he implemented quality measures and criteria for that. I would say he was the driving force behind that.Every manager with decision-making authority and budget responsibility was required to include anenvironmental impact assessment in the decision-making data, as stated in SASs environmental strategy.The airline had an integrated environmental management system in the total operations and management ofthe airline (TQM - Total Quality Management). See Exhibit 3 for an overview of SASs environmentalpolicy. Each year SAS measured both the overall and environmental image of the airline (see Exhibit 4). This measurement was based on a Customer Satisfaction Index. When the environment moved up to a strategic level in 1995, the environmental image was not as strong as the overall image. But gradually over the years, SASs environmental image had helped boost the overall image of the airline. There were several motivations embedded in this quest for a positive environmental image such as boosting the overall image of the company, improving the "brand" of SAS and living up to the spirit of the Scandinavian people."What is the value of a brand?" asked Niels Eirik Nertun, environmental director for SAS. "How do youquantify the increase in business because of a positive environmental image? If the overall image of SAS is improved because of our environmental image, then the cost of having an environmental department isjustified. "SAS management cited other reasons that it was important to maintain a positive image with respect toenvironmental commitment and performance such as:• Negative publicity as a result of a poor environmental report from human rights/environmental organizations could have dramatic and immediate effects on the companys bottom line - even if it was a result of a supplier and not the company itself;• A growing need for environment, ethical and social accountability through transparency and reporting;• As a tool for negotiation with government and NGOs;• Establishing a leadership role in dialogues about the regulatory environment; and

×